Friday, May 22, 2015

I have been glancing through the 3-part report by Infrastructure Australia (a summary here) on Australia's infrastructure needs over coming decades. I was mainly interested in the transport sector and proposals that looked - on casual reading of the press this morning - like yet another case for user charges (congestion charging and heavy vehicle charging for road damage costs). As I started working on these issues more than 20 years ago I do get a little peeved by the almost annual attempt to revive such discussions somewhere which always get promptly forgotten.

On this occasion I can only say I am underwhelmed by the stupidity of the Infrastructure Australia analysis. They still don't understand the basics of user-charging. Nor for that matter did Ian Harper in his recent reported proposals for competition reform.

Infrastructure Australia take as given Australia's dismal future population trend forecasts (fair enough not their concern, but in my view the forecast rates of population growth via our migration program are unacceptably high) and then look for ways of dealing with the surge in congestion and heavy vehicle demands that will result. Their answer? Build more roads everywhere and find ways of funding such investments. Their answer? Road use charges that fund the roads.

That fundamentally misrepresents the intent of user charges. Unless these prices target congestion and road damage costs this won't ensure efficiency. Indeed the issue is not primarily one of funding at all. All roads - new and old alike - that are subject to external costs should be priced to eliminate the external costs imposed on them (congestion and road damagers) so that all roads are utilised efficiently. Then if the roads make a profit expand their scale thereby making expansion decisions that reflect demands at the socially correct price.

Its the same old dumb-assed "engineer think" that has dominated Australian road infrastructure planning for decades. It is a shame that they cannot get the basic logic right.

A tax expenditure is a bit of tax the government could grab but it does not - it foregoes the tax. It is just like government spending in terms of its impact on the budget deficit. They increase the deficit. Actually more than a "bit" . Huge amounts of foregonee possible tax revenues arise:

Exemptions of capital gains-tax on family home $25b

Exemptions on residences previously lived in $20.5b

Concessional tax on superannuation $16.3b

These alone would boost the total tax take by 12% and obliterate the deficit. These tax expenditures have grown dramatically over the paast few years because of the property booms in our capital cities. Getting rid of housing exemptions would reduce property prices and leave our children better-off. Over-investment in housing would give way to more productive investments in other areas.

Generally even without adding to tax income the fewer these types of exemptions therec are the smaller are the excess burdens (deadweight losses) of the taxesc that remain. Big taxes impose disproportionatetely large inefficiency costs - roughly they are proportional to the square of the tax size.

Apart from income tax deductions there are also exemptions from the GST - Australia compared to NZ which does have a broadly based GST has 40% less coverage. Some big items here:

Exemptions of food from GST $6.4b.

Exemption of education $3.9b

Exemption of health services $3.6b etc etc.

There are plenty of opportunities to resolve our fiscal difficulties if politicians had the guts and stamina to approve such changes. They won't in the foreseeable future. We are timid of even modest cuts in childcare benefits! A basic principle of Australian policy (a version of the Pareto Principle) - no policy should be undertaken unless it disadvantages no-one. There are no such policies so we will do nothing!